Case 6: Price discrimination (homework)

In essence students are given here the repeated opportunity to select the best price schedule when various forms of price discrimination are possible. The student is the seller who can sell up to two identical items to each of two different buyers. Each item costs £5 to produce. The computer takes the role of the two buyers who have the following valuations for the item:

1 item

2 items

Buyer A

£20

£20

Buyer B

£30

£40

As illustrated in the table, the second item adds no value for buyer A, but a value of 10 for buyer B. Twenty rounds are played. In the first five rounds the same, uniform price has to be set for each unit sold to any buyer (uniform price, no price discrimination). In the next five rounds different prices may be charged to different buyers, but the same price must be taken for each unit (third-degree price discrimination). In rounds 11–15 the prices have to be the same for both buyers, but different prices can be charged for different units (second-degree price discrimination). Finally, in the last five rounds different prices can be taken per unit and per consumer (first-degree price discrimination).

It is best to let students do the experiment before price discrimination is discussed in the lecture. One can then discuss each scenario in a classification of price discrimination. The lecturer can ask the students how much money it was possible to make in each scenario and why. It will become transparent why the detailed form of price discrimination matters.

In analysing results in second year microeconomics, 90 students participated in our experiment. Only two managed not to get the right answer ever in the first five rounds. The next five rounds are more difficult and about 25% have difficulties in finding the correct answer. Rounds 11–15 are the hardest and only 50% get it right most of the time (i.e. at least two times out of five). There is only a slight improvement for the last five rounds where about 40% of the students never get a profit above 40 and hence do not see how to get a higher profit out of buyer B by discouraging them to buy a second unit. Admittedly, we did not give incentives for good performance and so we see that there is a substantial fraction of non-serious answers (about 20%). Still, it is revealing to see where some of the students have serious difficulties to which one can respond in a class discussion